MBA 702 EXAM 3 Questions
LSUS Corporation has 80,000 bonds outstanding that are selling at par value. Bonds
with similar characteristics are yielding 8.6 percent. The company also has 4 million
shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a
share. The U.S. Treasury bill is yielding 4 percent and the market risk premium is 8
percent. LSUS Corporation's tax rate is 34 percent. What is LSUS Corporation's
weighted average cost of capital? - answer11.47%
A year ago, Han purchased 500 shares of LSUS Corporation's stock at a price of
$49.03 per share. The stock pays an annual dividend of $.10 per share. Today, you sold
all of your shares for $58.14 per share. What is his total dollar return on this
investment? - answer$4,605
A stock had returns of 12 percent, 6 percent, 13 percent, -11 percent, and -2 percent
over the past five years. What is the geometric average return for this time period? -
answer3.19%
Assume LSUS Corproation is similar to its industry with one exception, it has high fixed
costs relative to all other firms in that industry. Given this, you should expect LSUS
Corproation - answera higher beta than its industry.
The weighted average cost of capital for a firm is the: - answeroverall rate which the firm
must earn on its existing assets to maintain its value.
Which one of these statements related to beta is correct? - answerThe sample size
used to compute beta may be too small to yield a reliable result.
Standard deviation measures _____ risk while beta measures ____ risk. -
answerunsystematic; systematic
The beta of a firm is more likely to be high under which two conditions? - answerhigh
cyclical business activity and high operating leverage
You have a portfolio comprised of two risky securities. This combination produces no
diversification benefit. The lack of diversification benefits indicates the returns on the
two securities: - answermove perfectly in sync with one another.
Which one of the following statements concerning the standard deviation is correct? -
answerThe higher the standard deviation, the higher the expected return.
, A portfolio consists of Stocks A and B and has an expected return of 11.6 percent.
Stock A has an expected return of 17.8 percent while Stock B is expected to return 8.4
percent. What is the portfolio weight of Stock A? - answer34.04%
The excess return you earn by moving from a relatively risk-free investment to a risky
investment is called the: - answerrisk premium.
LSUS Corporation's stock has a beta of 1.23. The risk-free rate of return is 2.86 percent
and the market rate of return is 11.47 percent. What is the amount of the risk premium
on LSUS Corporation's stock? - answer10.59%
Capital market history shows us that a correct ordering of the average arithmetic mean
return for asset classes, from lowest to highest, is: - answerU.S. Treasury bills,
government bonds, corporate bonds, large-company stocks.
Risk that affects a large number of assets, each to a greater or lesser degree, is called
_____ risk. - answersystematic
MM Proposition II is the proposition that: - answerthe cost of levered equity depends
solely on the return on debt, the debt-equity ratio, and the tax rate.
One of the indirect costs of bankruptcy is the incentive for managers to take large risks.
When following this strategy: - answerstockholders expropriate value from bondholders
by selecting high-risk projects.
MM Proposition I with no tax supports the argument that: - answerit is completely
irrelevant how a firm arranges its finances.T
The LSUS Corproation has a levered cost of equity of 14.29 percent and a pretax cost
of debt of 7.23 percent. The required return on the assets is 11 percent. What is the its
debt-equity ratio based on MM Proposition II with no taxes? - answer0.87
The free cash flow hypothesis states: - answerthat issuing debt requires interest and
principal payments to be paid thereby reducing the potential of management to waste
resources.
LSUS Corporation has shares of stock outstanding with a par value of $1 per share and
a market-to-book ratio of 2.1. The balance sheet shows $5,000 in the common stock
account, $58,000 in the capital in excess of par account, and $32,500 in the retained
earnings account. The firm just announced a 50 percent stock dividend. What is the
value of the common stock account after the dividend? - answer7500
You own 25 percent of LSUS Corporation, which is an closely held all-equity firm. You
have decided to retire and want to sell your shares. The other shareholders have
agreed to have the firm borrow $1.5 million to purchase all your shares of stock. What is
the total value of this firm today if you ignore taxes? - answer$6 million
LSUS Corporation has 80,000 bonds outstanding that are selling at par value. Bonds
with similar characteristics are yielding 8.6 percent. The company also has 4 million
shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a
share. The U.S. Treasury bill is yielding 4 percent and the market risk premium is 8
percent. LSUS Corporation's tax rate is 34 percent. What is LSUS Corporation's
weighted average cost of capital? - answer11.47%
A year ago, Han purchased 500 shares of LSUS Corporation's stock at a price of
$49.03 per share. The stock pays an annual dividend of $.10 per share. Today, you sold
all of your shares for $58.14 per share. What is his total dollar return on this
investment? - answer$4,605
A stock had returns of 12 percent, 6 percent, 13 percent, -11 percent, and -2 percent
over the past five years. What is the geometric average return for this time period? -
answer3.19%
Assume LSUS Corproation is similar to its industry with one exception, it has high fixed
costs relative to all other firms in that industry. Given this, you should expect LSUS
Corproation - answera higher beta than its industry.
The weighted average cost of capital for a firm is the: - answeroverall rate which the firm
must earn on its existing assets to maintain its value.
Which one of these statements related to beta is correct? - answerThe sample size
used to compute beta may be too small to yield a reliable result.
Standard deviation measures _____ risk while beta measures ____ risk. -
answerunsystematic; systematic
The beta of a firm is more likely to be high under which two conditions? - answerhigh
cyclical business activity and high operating leverage
You have a portfolio comprised of two risky securities. This combination produces no
diversification benefit. The lack of diversification benefits indicates the returns on the
two securities: - answermove perfectly in sync with one another.
Which one of the following statements concerning the standard deviation is correct? -
answerThe higher the standard deviation, the higher the expected return.
, A portfolio consists of Stocks A and B and has an expected return of 11.6 percent.
Stock A has an expected return of 17.8 percent while Stock B is expected to return 8.4
percent. What is the portfolio weight of Stock A? - answer34.04%
The excess return you earn by moving from a relatively risk-free investment to a risky
investment is called the: - answerrisk premium.
LSUS Corporation's stock has a beta of 1.23. The risk-free rate of return is 2.86 percent
and the market rate of return is 11.47 percent. What is the amount of the risk premium
on LSUS Corporation's stock? - answer10.59%
Capital market history shows us that a correct ordering of the average arithmetic mean
return for asset classes, from lowest to highest, is: - answerU.S. Treasury bills,
government bonds, corporate bonds, large-company stocks.
Risk that affects a large number of assets, each to a greater or lesser degree, is called
_____ risk. - answersystematic
MM Proposition II is the proposition that: - answerthe cost of levered equity depends
solely on the return on debt, the debt-equity ratio, and the tax rate.
One of the indirect costs of bankruptcy is the incentive for managers to take large risks.
When following this strategy: - answerstockholders expropriate value from bondholders
by selecting high-risk projects.
MM Proposition I with no tax supports the argument that: - answerit is completely
irrelevant how a firm arranges its finances.T
The LSUS Corproation has a levered cost of equity of 14.29 percent and a pretax cost
of debt of 7.23 percent. The required return on the assets is 11 percent. What is the its
debt-equity ratio based on MM Proposition II with no taxes? - answer0.87
The free cash flow hypothesis states: - answerthat issuing debt requires interest and
principal payments to be paid thereby reducing the potential of management to waste
resources.
LSUS Corporation has shares of stock outstanding with a par value of $1 per share and
a market-to-book ratio of 2.1. The balance sheet shows $5,000 in the common stock
account, $58,000 in the capital in excess of par account, and $32,500 in the retained
earnings account. The firm just announced a 50 percent stock dividend. What is the
value of the common stock account after the dividend? - answer7500
You own 25 percent of LSUS Corporation, which is an closely held all-equity firm. You
have decided to retire and want to sell your shares. The other shareholders have
agreed to have the firm borrow $1.5 million to purchase all your shares of stock. What is
the total value of this firm today if you ignore taxes? - answer$6 million
